The Rise of Discriminatory Regionalism

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The Rise of Discriminatory Regionalism

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Bibliographic details

• Authors: MICHELE RUTA
• Published: June 1, 2023

Overview

• Author: MICHELE RUTA, division chief in the IMF’s Strategy, Policy, and Review Department.
• Publication: F&D Magazine, June 2023.
• Central thesis: In an era of growing global tensions, regional trade alliances may shift from promoting integration toward building discriminatory barriers against nonmembers.

Evolution of regional trade agreements (RTAs)

• Count and scale:
  • Fewer than 50 RTAs in 1990.
  • More than 350 RTAs today.
  • The 2018 African Continental Free Trade Agreement (AfCFTA) covers more than 1.3 billion people and is the world’s largest regional trade agreement.
• Depth and scope:
  • Pre-1990s typical agreements focused mainly on tariff liberalization and border issues (customs).
  • Since the 1990s, RTAs have become “deeper,” addressing regulations and nontariff measures and broadly regulating three overlapping policy areas:
  • Integration of goods, services, and factor markets and rules regulating areas such as tariffs, services, investment, and intellectual property rights.
  • Restrictions on governments’ ability to take action that could reverse economic integration, including regulatory barriers, sanitary measures, subsidies, and rules governing competition.
  • Protection of rights that could be diminished by market integration if regulations governing areas such as labor or environmental standards are not upheld.

Effects on trade and nontrade outcomes

• Trade integration:
  • Deep RTAs increased trade between members by 40 percent on average (study cited).
  • Many recent RTA provisions are nondiscriminatory and have reduced costs for members and nonmembers alike.
  • Rules that increase competition, regulate domestic subsidies, or support adoption of international regulatory standards have been found to boost exports by nonmembers.
• Nontrade outcomes:
  • Provisions on investments, visa and asylum issues, and intellectual property protection have reduced the cost of cross-border activities, stimulating foreign direct investment, migration, and technology flows.
  • One study found that environmental provisions in RTAs prevented about 7,500 square kilometers of deforestation during 2003–14.
  • Unintended effects: RTAs without child labor provisions can reduce child employment and increase school enrollment; RTAs with child labor bans can shrink children’s wages and sometimes lead poorer households to send more children into the labor market to recoup lost income.

Complementarity between regionalism and multilateralism

• Mechanisms of complementarity:
  • Societal supporters (for example, exporting firms) often favor both multilateral and regional integration.
  • WTO laws and dispute mechanisms form the foundation of many RTA laws; many RTAs restate existing WTO commitments and rely on WTO adjudication for enforcement.
  • Nondiscriminatory RTA commitments can promote both regional and multilateral integration.
• Implication:
  • In times of conflict, regionalism may be weaker because RTA laws would rest on shakier WTO laws and anti-integration domestic forces would oppose both regional and multilateral integration.

Risks of discriminatory regionalism

• Historical precedent:
  • In the 1930s, discriminatory regionalism and protectionist measures reshuffled trade patterns; for the UK, imports from the British Empire rose from less than 30 percent at the beginning of the period to more than 40 percent at the end.
• Contemporary manifestations:
  • Surge of protectionist measures, such as local content requirements in subsidy programs and export restrictions targeting non-regional partners.
  • Use of stringent rules of origin to increase regional value content at the expense of extraregional inputs.
  • Leveraging RTAs for nontrade objectives: higher labor and environmental standards, adoption of domestic rather than global standards, or redirection of supply chains for national security reasons.
  • Example cited: an agreement signed at the end of March between Japan and the United States on certain critical minerals, characterized as limited in scope and different from deep RTAs of prior decades.
• Consequences:
  • Discriminatory practices are contrary to the spirit, if not the letter, of multilateral trade rules and could increase integration costs, hinder efficiency, and make regionalism less effective.

Scenarios and outlook

• Continued deep, nondiscriminatory RTAs:
  • Would preserve integration between members and continue experimentation with new forms of integration.
  • Deep trade agreements that reduce market fragmentation should be encouraged, particularly in regions such as Africa with large development gains from a continental market.
• Shift toward discriminatory regionalism:
  • RTAs could weaken and grow more discriminatory if multilateral anchors erode, erecting protectionist walls against nonmembers.
  • Regionalism without multilateralism may be more exposed to disintegration forces.
• Conclusion:
  • There is no choice between regionalism and multilateralism; only a choice between integration and disintegration. A revival of multilateralism is necessary to complement RTAs in an age of conflict.

Source: F&D Magazine, “The Rise of Discriminatory Regionalism,” Michele Ruta, June 2023.

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